Individual rates could more than double; group plans should expect double-digit rate increases

Employer group health insurance plans in Iowa, which have had moderate premium increases in the past few years, are nearly guaranteed to face double-digit spikes next year as the federal health-care overrhaul kicks into high gear.

And for individual policyholders, who have suffered through three successive years of double-digit premium increases, the recent past may seem like the good old days come 2014. The Business Record spoke with three Iowa insurance experts, two of whom said increases of 100 to 125 percent are likely for individuals who purchase their own insurance.

The big rate increases for both individuals and groups largely will be driven by the expected influx of less-than-healthy people who were previously uninsured into the private health insurance system. Adding those individuals will spur insurers to increase premiums to compensate for the resulting rise in claims.

The rules governing how insurers rate employer groups to set rates will also change significantly next year. That will benefit some groups and hurt others. In a perverse twist, the healthiest groups may see the largest increases while less healthy groups’ premiums may decrease the most relative to what they’re paying this year, because insurers will no longer be able to provide discounts based on health status. Further, rating differences based on gender will go away, and the premium differential between what insurers can charge the oldest and youngest group members will be reduced.

Preparing for what lies ahead in 2014 and beyond is “mind-boggling for employers,” said David Lind, principal of David P. Lind Benchmark, a Clive firm that tracks benefits trends statewide. That uncertainty factor will contribute to higher rates, Lind said, because even the insurers are in uncharted waters.

Perhaps the biggest uncertainty is whether the health-care overhaul will do anything to slow the high rate of use of medical services, or whether the changes in the law will, in fact, lead to more use of the health-care system and higher costs, as some suggest.

“We can keep our administrative costs low and there are a lot of things we can control, but the one thing that we can’t control is utilization,” said Courtney Greene, a spokeswoman for Wellmark Blue Cross and Blue Shield.

More coverage, more taxes

Steve Flood, senior vice president of employee benefits at Holmes Murphy & Associates Inc., said 2014 might be the worst year for premium increases in his 25 years in the business.

“Bad years, on average, have been 10 to 14 percent increases,” he said. “The rates are high now, but I wouldn’t be surprised if (next year) the average increases in that small group market weren’t over 20 percent.

“Let’s say we have 100,000 people in Iowa who are uninsured. Now we say, ‘Everybody can come in – some of you will get a subsidy, some of you won’t.’ What we see happening is that the 10 percent of the population that incurs 90 percent of the claims, they’re going to buy coverage,” Flood said. “So basically you’re getting the entire claim load of the 100,000.”

At the same time, there won’t be many compelling reasons for people who are currently uninsured and who are relatively healthy to buy coverage, Flood said.

“So we don’t think 100 percent increases in the individual market next year is alarmist at all,” he said. “We’ve heard that 120 percent may be more realistic.”

This year, Holmes Murphy is anticipating that increases in the small-group market will average 10 to 15 percent. “We think that in 2014, that number will go close to 20 to 25 percent,” Flood said.

The timing of renewals will influence how soon groups begin seeing steep increases, he noted, because the later a renewal is made this year, the more the group is paying for higher-cost 2014 coverage. For instance, “if I renewed in January, I would have a significantly lower increase than if I renew in July 2013,” he said.

Additional federal health-care taxes that go into effect in 2014 – which insurers will pass through to consumers – also will increase the bottom-line insurance costs for individuals and groups. Between three new government fees, employers will pay an estimated $200 per member annually. “This is going to cause employers, because it’s per member, to really look at who they are offering coverage to and the cost,” Flood said.

Wellmark will pass those fees through to covered employees just as it does any other tax, said Patrick Ryan, Wellmark’s director of actuarial consulting.

“We don’t have a whole lot of profit built in, and there really isn’t sufficient room for (Wellmark to absorb those fees),” he said. “The fact that the fees are exceeding what little profit is built in doesn’t really allow us to accommodate that situation.” Passing along those governmental fees is no different than what occurs in other industries, such as telecommunications and the hospitality industry, he noted.

Based on group health plan renewals it has already processed, Wellmark’s increases for 2013 are so far relatively small – 5.8 percent for small groups and 7.7 percent for large groups, on average, Ryan said.

Impact on insurers

Because Wellmark and other insurers are simply the conduits for collecting premiums and paying claims, they’re not as likely to be hurt by the health overhaul changes, Flood said.

“(Wellmark is) the 10,000-pound gorilla in the marketplace, so everyone wants to hate them,” he said. “But historically, they’ve had a higher loss ratio (percentage of premiums paid out as claims) than their competitors. The reality is, as long as they keep their expenses in line and the laws don’t change, they should not be negatively affected, because they’re not paying the claims. It’s the people paying the premiums who are paying the claims.”

Where Wellmark could be hurt is the individual market, Flood said.

“I don’t know if Wellmark will be able to raise rates fast enough to keep up with claims in the exchange,” he said. “The average person thinks that in 2014 health-care costs will go down, and they’ll be shocked. The exchange will be a pool of risks that no one will want to be exposed to, but they’ll be forced to. To some extent, it’s like being able to buy car insurance after you’ve had a wreck. All the theories you’ve learned about insurance kind of go out the window with health reform, because you lose the ability to avoid risk from the carrier’s standpoint.”

Lind, whose firm has tracked health insurance cost trends among Iowa companies since 2001, said the new rating mechanisms for groups and the advent of the state and federal purchasing exchanges are creating “a whole new world” for the industry in 2014.

“It’s like we’re really resetting the shot clock,” he said. “We’re entering a whole new era, and that uncertainty will also drive the increases.”

Though Lind won’t have 2013 survey results indicating the extent to which employers saw premiums increase until later this year, brokers he talks with say they expect increases at least in the low double digits this year. The premium increases aren’t likely to moderate until the health-care system can get its arms around two key problems – poor coordination of care on the providers’ side and poor health habits on the consumer side, Lind said.

Solutions

Flood believes that employers will either have to become much more actively engaged in managing their health plans, or move to more of a “defined contribution” model in which employees are provided a set amount of money to go out in the market and purchase their own coverage.

In 2014, employers can charge an extra 30 percent on premiums for people who comply or don’t comply with health choices such as not smoking, which could enable employers to have some control over the risks they take on and over time, “create a cleaner pool of risk,” Flood said.

“If I as an employee choose to continue to defy what are best practices in medicine and I’m working for an employer who’s really pushing that envelope, I’ll have to either change or go to work for an employer that isn’t doing this,” he said. “That’s why a a lot of employers will simply be forced to just say, ‘Here’s the money – get your own coverage.’”